By John Richardson

NEITHER SIDE seems to want a war but at febrile times like this miscalculations could see the US and Iran in a full-scale conflict.

Iran might feel it has little more to lose. Its economy is suffering so badly from increased sanctions, especially as a result of the collapse in its oil and petrochemicals exports, that hardliners within Iran may believe that further disrupting oil and gas production across the Middle East will give their country leverage in any negotiations.

Whilst the hardliners might calculate that a further attack on Middle East oil and gas facilities wouldn’t lead to a full-scale war the risk, is, I said, that they miscalculate. A US military response to further Iranian attacks would also carry the risk of miscalculation. Would the response be weighted and conducted in exactly the right way?

The “further’” in the above sentence assumes, as is widely thought to be the case, that Iran was behind the 14 September drone and cruise missile attack on Saudi oil and gas facilities.

Closure of the Strait of Hormuz

Immediately after the attacks there was a 49% reduction in ethane supply to some of the Kingdom’s steam crackers and reports that repairs to natural gas-liquids production would take several months. Since then, though, the picture has improved considerably with ethane feedstock supply getting back towards normal.

But what if the Strait of Hormuz were to be closed-down? This is one of the ultimate weapons Iran seems to possess given its proximity to the Strait and its military presence there.

Recent incidents in the Straits and the Gulf are detailed in the map on the left of the above slide – from a new series of ICIS infographics.

The same infographics list all the petrochemicals capacities in the Middle East which would be affected by a shutdown of the Strait. What’s excluded is Saudi Arabian capacity on the Kingdom’s west coast – at Yanbu and PetroRabigh. Both these sites would continue to have access to global markets via the Red Sea.

Most of the capacity in Iran itself, and in Abu Dhabi Kuwait and Qatar, could be shut-in by a blockade of the Strait because of its location. Some output may, though, still find its way into export markets via road and rail.

The infographics also put the tonnes of Middle East capacity into the global context. The Middle East is responsible for 21% of global LLDPE capacity, 16% of ethylene glycols capacity, 16% of LDPE capacity and 14% of overall ethylene capacity. In the aromatics space, the Middle East accounts for 8% of global styrene capacity.

Breaking this down to the effect on PE exports

Now take a look at my guesstimate of the impact on actual PE exports from the Middle East, which you can see in the chart on the right-hand side of today’s slide. This makes use of the excellent data in our Supply & Demand Database.

The calculations take into account estimates of Saudi Arabian production on the east coast minus local demand and a small amount of polymers moved overland. The assumption is again that production on the west coast – at the Yanbu and PetroRabigh sites – would be unaffected.

Calculations also take into account Iranian production minus local demand and minus a substantial amount of PE moved overland to Turkey. Last year, Iran trucked an average of 5.8% of its total PE exports, across the three grades, to Turkey.

Abu Dhabi, Kuwait and Qatar production is on the Gulf and therefore heavily exposed to the Strait being closed. Here I took our estimates of production minus local demand (much smaller than Iran where local demand is big), and minus a small amount of polymers shipped overland.

The end-result would be a loss of 312,000 tonnes of total Middle East HDPE exports, 240,000 tonnes of LDPE and 370,000 tonnes of LLDPE, assuming that the waterway was completely shut for a month. This would account for between 8-14% of our assessments of global monthly production of HDPE, LDPE and LLDPE.

“Why a month?” you might ask. Why indeed. A closure of the Strait might last longer than that. Why not at the extreme six months? Then we would see Middle East HDPE exports fall by 1.9m tonnes, LDPE by 1.4m tonnes and LLDPE by 2.2m tonnes.

The damage wouldn’t end with the loss of Middle East petrochemicals exports. The loss of the exports would be just the tip of the iceberg.

“The Strait of Hormuz is the world’s most important oil chokepoint because of the large volumes of oil that flow through the Strait. In 2018, its daily oil flow averaged 21 million barrels per day, or the equivalent of about 21% of global petroleum liquids consumption,” writes the US Energy Information Administration in its latest review of the energy corridor’s importance.

With the fall in oil, naphtha and natural gas-liquids exports would come a fall in petrochemicals production outside the Middle East:

  • Many refinery-petrochemicals complexes and standalone steam crackers based on imported Middle East oil and naphtha would have to cut production.
  • Similarly affected would be propane dehydrogenation plants dependent on Middle East propane.
  • Condensate splitters, which convert Middle East condensates into light and heavy naphtha for petrochemicals production, would also struggle to operate.

Nobody would emerge as a winner

Petrochemicals buyers will view all of the above with alarm because of the potential disruption to their raw material supplies. This would cause huge and very costly disruptions up and down all the major global manufacturing value chains.

In theory, of course, ethane-based cracker-to-PE complexes outside the Middle East – in the US, Thailand, Malaysia, Europe and India – stand to benefit from a tighter global PE market.

But what would happen in practice would be radically different. Another major Middle East war, this time involving a militarily strong Iran (last time it involved a poorly armed Iraq), would have a hugely detrimental effect on the global economy.

Oil and petrochemicals prices would initially soar. But the demand destruction from higher fuels and other prices would be instant, as would be the sentiment effect from collapsing global stock markets as investors fled to the safety of cash.

The world can ill afford another Middle East war right now because it would occur at a time of severe trade tensions between the US and China and an underrated, under-reported and largely misunderstood structural and so long term slowdown in the Chinese economy. This slowdown cannot be reversed because it is do with an ageing population and unsustainable levels of debt.

This would be the perfect storm of adverse economic factors. And there would obviously be the tremendous human cost of another war in the Middle East. Let’s therefore hope that both sides reach a deal.

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